2015 (2) TMI 894 - AT - Income Tax

Tribunal partially allows appeals for 2005-06, 2006-07, dismisses 2004-05 appeal. Interest subsidy disallowance overturned.

The Tribunal partly allowed the appeals for assessment years 2005-06 and 2006-07 but dismissed the appeal for assessment year 2004-05. The Tribunal upheld ... Additional deduction u/s 35(2AB) disallowed - no inhouse scientific research has been carried out by the appellant - Held that:- Merely getting approval from ARAI and purchasing certain material from the market cannot be said to be carrying out in-house research & development activity. Research & development means to carry out research to find out some new technology or new equipment or product and that should be carried out in-house as per the requirement of section 35(2AB) of the Act. The assessee has failed to justify his claim of in-house scientific research carried out and therefore, no deduction under section 35(2AB) is admissible to the assessee. - Decided against assessee. Disallowance of interest paid on loans - CIT(A) directing the assessing officer that interest from FDs be assessed under the head Income from Other Sources - Held that:- The disallowance made by the Assessing Officer was ₹ 63,61,399/- being the difference in these two figures. Since the assessee could not establish that borrowings were for business purposes, deduction is not allowable u/s 36(1)(iii) of the Act and moreover, u/s 57(iii) also, deduction is already allowed by the Assessing Officer to the extent of interest income and entire interest expenditure cannot be allowed because it could not be established by the assessee that the borrowing was made for making investment in FDR by showing direct nexus between the borrowing from bank and making FDR in bank. Considering all these facts, we do not find any reason to interfere in the orders of the authorities below. - Decided against assessee. Disallowance of Bad and Doubtful Debts, Advances and others written off - Held that:- a clear finding is given by CIT(A) that the assessee has not written off bad debts in question and assessee has credited the amount to the account with the heading ‘provision for doubt debts.’ As per the provision of section 36(1)(vii), bad debt is allowable on actual write off and not on provision and hence, we do not find any reason to interfere in the order of CIT(A) on this issue - Decided against assessee. Fees to Registrar of Companies for enhancement of authorized capital - revenue expense v/s Capital expenditure - Held that:- The amount in question was debited by the assessee in the profit & loss account in the present year, the same is not allowable as deduction in view of these judgments of Hon'ble Apex Court in the case of Brooke Bond India Ltd. vs. CIT [1997 (2) TMI 11 - SUPREME Court] and Punjab State Industrial Development Corporation Ltd. vs. CIT [1996 (12) TMI 6 - SUPREME Court]. However, if the assessee can show that the cheque in question was not encashed by the ROC and reverse entry was passed by the assessee in the next year and the corresponding amount was taken by the assessee as income in the next year then in the next year, the same should not be taxed.- Decided against assessee. Payment of gratuity paid under the scheme of LIC - disallowance invoking the provisions of sec.40A(7) - Held that:- Since the issue is covered against the assessee by the Tribunal decision in assessee’s own case for assessment year 2002-03 and 2003-04 [2014 (8) TMI 767 - ITAT LUCKNOW] we do not find any reason to take a contrary view - Decided against assessee. Disallowance of interest subsidy on housing loan - non deduction of TDS - Held that:- in assessee’s own case for assessment year 2002-03 and 2003-04, this issue was decided in favour of the assessee and it was held that the interest subsidy to the employees is for maintaining harmonious relationship and welfare of the employees, which is nothing but business expenditure. Respectfully following this Tribunal decision in assessee’s own case, we hold that in the present year also, this disallowance is not justified. - Decided in favour of assessee. Unreconciled bank balance in the bank account - addition of ₹ 53,000/- - Held that:- there was a difference of ₹ 53,000/- as unreconciled bank balance in the bank account at Chennai for which no explanation was furnished by the assessee before the Assessing Officer or CIT(A). Even before us, no explanation has been furnished and therefore, we do not find any reason to interfere in the order of CIT(A) on this issue. - Decided against assessee. Issues Involved:1. Deduction under Section 35(2AB) of the Income Tax Act.2. Deduction under Section 36(1)(iii) of the Income Tax Act.3. Deduction of bad debts under Section 36(1)(vii) of the Income Tax Act.4. Treatment of fees paid to Registrar of Companies for enhancement of authorized capital.5. Disallowance of gratuity payment under Section 40A(7) of the Income Tax Act.6. Disallowance of interest subsidy on housing loan under Section 40(ia) of the Income Tax Act.7. Addition due to unreconciled bank balance.8. Addition of prior period expenses.Issue-wise Detailed Analysis:1. Deduction under Section 35(2AB) of the Income Tax Act:The assessee claimed an additional deduction under Section 35(2AB) for in-house scientific research, which was disallowed by the CIT(A) on the grounds that no in-house research was carried out. The CIT(A) referenced the assessee's failure to provide detailed expenditure specifically related to in-house research. The Tribunal upheld the CIT(A)'s decision, noting that the assessee did not demonstrate any in-house research activity, and merely obtaining approvals and purchasing materials did not qualify as in-house research.2. Deduction under Section 36(1)(iii) of the Income Tax Act:The assessee's claim for interest paid on loans was disallowed by the CIT(A) because the interest earned on fixed deposits was assessed under the head 'Income from Other Sources.' The CIT(A) concluded that the borrowings were not for business purposes but were invested in FDs, thus disallowing the interest under Section 36(1)(iii). The Tribunal upheld this decision, stating that the assessee could not establish that the borrowings were for business purposes, and the interest expenditure could not be allowed without showing a direct nexus between the borrowings and the FDs.3. Deduction of bad debts under Section 36(1)(vii) of the Income Tax Act:The assessee's claim for bad debts was disallowed because the debts were not written off but credited to a 'provision for doubtful debts' account. The CIT(A) and the Tribunal both held that under Section 36(1)(vii), bad debts are only allowable on actual write-off, not on provision.4. Treatment of fees paid to Registrar of Companies for enhancement of authorized capital:The assessee's claim for treating fees paid to the Registrar of Companies as revenue expense was disallowed, following the Supreme Court judgments in Brooke Bond India Ltd. and Punjab State Industrial Development Corporation Ltd. The Tribunal upheld the disallowance but directed the Assessing Officer to ensure that if the amount was reversed and treated as income in the subsequent year, it should not be taxed again to avoid double taxation.5. Disallowance of gratuity payment under Section 40A(7) of the Income Tax Act:The assessee's claim for gratuity payment was disallowed under Section 40A(7), as it was covered by the Tribunal's decision in the assessee's own case for earlier years. The Tribunal upheld the disallowance, following the precedent set in previous years.6. Disallowance of interest subsidy on housing loan under Section 40(ia) of the Income Tax Act:The assessee's claim for interest subsidy on housing loans was allowed by the Tribunal, following its decision in the assessee's own case for earlier years. The Tribunal held that the interest subsidy was for maintaining harmonious relationships and welfare of employees, thus qualifying as business expenditure.7. Addition due to unreconciled bank balance:The addition of Rs. 53,000 due to an unreconciled bank balance was upheld by the Tribunal, as the assessee failed to provide any explanation or reconciliation for the difference in the bank account at Chennai.8. Addition of prior period expenses:The assessee's claim for prior period expenses was disallowed, as the expenses related to earlier years and the assessee could not establish that the liability for these expenses arose in the current year. The Tribunal upheld the CIT(A)'s decision, noting that the assessee did not demonstrate that the expenses crystallized in the current year.Conclusion:The appeals for assessment years 2005-06 and 2006-07 were partly allowed, while the appeal for assessment year 2004-05 was dismissed. The Tribunal upheld the CIT(A)'s decisions on most issues, except for the disallowance of interest subsidy on housing loans, which was decided in favor of the assessee.